Contracting with company Flashcards
Newbourne v Sensolid ( common law rules)
company does not exist fully until duly incorporated - common law rules:
- a non-existent company has no contractual authority
- pre-incorporation contract is a legal nullity (N v S)
- neither party can enforce a pre-incorp contract
Kelner v Baxter (can find valid contract if agent of company found to be intended party)
hotel agreed to buy large consignment of wine, refused to later take it - court found it did take effect on person acting on behalf of company - key point: both parties aware company not formed yet.
Halifax v DLA piper
emphasised importance of having both parties with common intention that agent is bound - not sufficient for one to realise company not formed yet
Natal Land v Pauline Colliery
After incorporation a company cannot ratify/adopt pre-incorporation contract as company did not legally exist at time contract made - must be fresh contract or novation = 3rd party has to agree to new contract coming into force and company, in effect, taking it over
Phonogram v Lane (S.51 issue)
a company that has not been formed was said by lord denning not to be relevant; intention to contract with a company that has not been formed yet is relevant question.
proposed pop group to be managed by a company that did not exist and was never formed - P signed record contract with company and paid an advance - L signed contract on behal of company - P sought to recover advance from L personally; L argued that provision did not apply because:
- company not formed and never being formed
- he had no intention of being formed personally
CoA held must be express agreement to override provision (S.51) and so agent’s lack of intention to be bound is not sufficient to remove protection intended for 3rd parties.
Braymist v Wise (both parties can enforce contract) - S.51
P owned land and planned to transfer to Subsidiary B - P’s solicitor arranged to form subsidiary B and it became incorporated after contract for sale of land - W agreed to buy land from B and paid a deposit - Solicitor signed contract as agent of B - W refused to complete purchase from B and solicitor argued could enforce contract against W, But CoA held an agent is both liable for pre-incorporation and able to enforce it if they so wish.
but does identity of contracting party carry importance? (Solicitor = agent)
Royal Mail v Maple Teesdale (when S.51 provision does not apply)
RME agreed to sell land in london to KGH, MT (acting for KGH) did not know KGH ltd was not formed yet (neither did RME) - MT signed contract on behalf of KGH and provided benefit of contract was personal to buyer and not assignable to any other party - RME sought to enforce contract against MT
HELD; MT could not rely on wording of contract as sufficient contrary agreement to avoid liability - in particular court was of view that the parties could not have had provisions of S.51 CA 2006 in mind when agreeing wording of contract
(followed phonogram = must be express and clear agreement)
Badgerhill v Cottrell
Agent not personally liable on basis of misprints/spelling - would previously be liable under S.349(4) CA 1985
Queen Moats Plc (directors ability to borrow money)
D’s limited to 4x share capital/credit - shareholders resolution increased limit to £2 billion but not correctly done so old limit remained - directors & advisors were unaware of this - legal consequences of exceeding old limit:
- all borrowing in excess unauthorised
- directors face personal liability
- creditors had to rely on statutory protection
shareholders finally increased borrowing limit properly and also passed resolution to ratify unauthorised borrowing and relieve directors of personal liability
Royal British bank v Turquand ( protection for 3rd parties - common law position) (S.40) (“internal management rule”)
held people transacting with companies are entitled to assume internal company rules complied with even if not (apparent authority at board +senior management level) - but 3rd parties were deemed to have notice of constitution initially (constructive notice) (however 3rd Ps now have protection under S.40 = can enforce contact if:
- they are ‘a person dealing with the company’
- problem is a limitation in the constitution on the power of the director
- they are dealing with company in good faith
Smith v Henniker (if 3rd party is director) (S.40)
3rd party can still rely on it if acting in good faith - issue: doubt if sole director can rely on it e.g. in Smith 3rd party could not rely on S.40 because they were a director and only person acting as board of the company - in any event they are subject to S.41 consequences
EIC Services v Phipps (S.40 - if 3rd P is shareholder)
cannot rely on S.40 where transaction is unauthorised dividend, otherwise can rely on it subject to good faith
(unauthorised dividend would need to be agreed at general meeting)
Wrexham v AFC (3rd party shareholder -S.40)
knowledge of limits on D’s power not enough to rebut 3rd Party - no duty to inquire as to authority of directors under constitution, but transaction that involved breach of fiduciary duty where D was working to remove assets from club and 3rd party knew this and found not in good faith.
Limits on directors powers when contracting with company
Substantive limits =
- overall limit on power to borrow/receive credit e.g. to amount of/multiple of share capital
- restrictions on certain kinds of transactions e.g. granting security, acquiring businesses etc - may need shareholders to approve these limits.
Procedural limits =
- quorum: minimum number of members of an assembly that must be present at any meeting to making proceedings of that meeting valid (usually concerns voting rights/power to veto)
parties. person dealing with company?
covers parties to any kind of transaction/act; can even be a gratuitous act.
